Rewarded vs. Unrewarded Complexity in Organizations

But not all complexity is equal. Frans van Houten, CEO of Royal Philips, makes a case for distinguishing between what he calls rewarded and unrewarded complexity. Rewarded complexity drives a multifaceted growth strategy through a network of value-adding contact points across diverse teams, functions, and business units around the world. A well-designed organization structure brings management attention to the nodes where value and capabilities are created—the intersection of customers, brands, products, emerging markets, functional expertise, and other strategic choices.

Often, rewarded complexity is a result of making things simpler or more compelling for customers. The powerful Walmart business units inside P&G, Unilever, and other consumer brand companies create enormous complexity challenges for the leadership of these companies, but Walmart, the customer, is well served by this single point of interface. This is a value-creating form of tension. Conversely, when organization models are made “simple” for leaders to manage internally, the customer is often left to navigate the supplier’s inner workings or to interact with multiple sales representatives across different product divisions. The complexity is pushed out to the customer.

Unrewarded complexity is largely the result of unnecessary layering and misalignments among structure, roles, decision rights, processes, and rewards systems. Confusion and frustration, internally and for customers, are nearly always symptoms of organizations that have fuzzy roles and decision rights, competing incentive systems, and leaders who do a poor job managing across boundaries. It is this unrewarded complexity that has made matrix organization structures lightning rods. Managers and employees blame the organizational model, when in fact it is poor activation that is to blame for unwieldy, conflicting ways of working. The difference between rewarded and unrewarded complexity is summarized below:

Rewarded Complexity: Reflects the complexity of the strategy- the number of connection points among business units and functions necessary to extract the most value from a company’s assets.

Unrewarded Complexity: Unnecessary layers, P&L units, dual reporting, and duplication combined with ineffective management and business processes and metrics are the recipe for unrewarded complexity.

We are working with a large consumer products company now that has successfully managed a complex matrix for a number of years. They are now adding new dimensions to the organization in the form of omni-channel business units that will shift the business model from wholesale to a more vertical retail model, with both digital commerce and as well as physical doors. Because of the additional complexity this will create, they are looking for opportunities to reduce other forms of complexity from the existing model, including delayering, before activating the new changes. This is a wise move.

Strategic complexity can yield competitive advantage, but only if the organization is designed to extract the rewards. There is no reason for leaders to avoid complex strategies. However, if such strategic paths are chosen, understand the predictable implications and make design choices that maximize rewarded complexity and minimize unrewarded complexity.